Retain ‘hold’ on Punjab National Bank with a price target of R150 per share.
While asset quality has improved, growth has slowed at PNB. Also, while the risk-weighted asset (RWA) mix has improved, growth in stressed sectors remains high. Internals of profitability remain weak.
Profitability ratios remain weak with return on assets (ROA) at 0.5% and RoE at 7.5%. Common Equity Tier-I (CET1) is at 8.8 %, Tier-I ratio 9.4%. Loans were up 9.6%, driven by foreign loans (31.4% y-o-y). Domestic loan book was up 6.7% y-o-y, while retail was up 25.3%y-o-y and industry 8% y-o-y. However there was a decline in service sector
(-17.4% y-o-y). Loans to stressed sectors increased – chemicals (+41.7%), iron & steel (+24.6%), construction (+35.8%) and power (+9.7%).
Casa ratio was down 1.7% to 38.9%, with only a 9.5% growth in SA balances. With a slowdown in domestic loans, share of bulk deposit is down to 1.2% of total deposits. RWA to total assets has declined to 65% from 69% a year ago — helping capital ratios and suggests a conscious approach to manage RWA growth.
We rationalise net interest margins down, considering the incremental growth focus on retail assets where spreads are smaller and taken down the expense ratio a bit resulting in positive delta in core PPOP growth. However, we are not that sure on the asset quality performance. Consequently, we have increased the credit costs, which reflect in EPS cuts of 12.7%, 7.5%and 12.3% over FY16-18. Our FY15-18 EPS CAGR currently stands at 28%. PNB needs capital infusion to fix balance sheet hole and to have growth capital.